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sumption for his own product, and the competition of other products.12
(All consumer products, of course, are "substitutes" for one another in the
attainment of "satisfaction.") He knows, therefore, that the higher the
price he asks for his product, the smaller will be the quantity bought by con-
sumers. The keenness of the competition provided in general by all other
consumer products will express itself in the elasticity of market demand
for the monopolized product. (It is the market demand that is relevant to
the decisions of the monopolist-producer, since he has to deal with the entire
demand of the market for his product. The demand curve that he faces
is the demand curve of the entire market.)
A set of factors not considered by the monopolist-seller of a resource
complicates the decision of the monopolist-producer. These relate to the
costs of production of the monopolist-producer. Like the monopolist-seller
of a resource, the monopolist-producer must weigh, against the increased
revenue that can be obtained from what he is able to sell at a higher price,
the loss in revenue that he suffers due to what, precisely because of this
higher price, must remain unsold altogether. But in addition the monopo-
list-producer must consider the effects of asking a higher product price upon
his aggregate and per-unit costs of production. At the higher price he
will sell less of the product, will produce less of the product, and will in
consequence, in the short run certainly, have lower per-unit costs of produc-
tion. Thus, offsetting the loss in revenue on potential units of product that
will not be sold or produced due to the higher price, the monopolist can
weigh (besides the higher revenue on the products produced and sold) the
saving in costs of production both on the units of product not produced,
and also on the units that are produced (at costs that are lower due to the
smaller volume of output).
The deliberations of the monopolist-producer can be conveniently
schematized by means of diagrams. In Figures 12-3a, b, and c, on the follow-
ing pages we assume (heroically) that the producer knows (or believes that
he knows) both his cost curves and the market demand curve for his product.
The diagrams show the short-run average and marginal cost curves of the
monopolist-producer (these costs not including any cost attributable to the
use of the monopolized resource). Each of the diagrams reflects a particular
(different) demand situation shown by the relevant market demand curve
for the product (which is, therefore, also the monopolist-producer's average

12 As usual, the elasticity of the market demand curve for the monopolized product
reflects the degree to which it faces the competition of other products in general. The
chief purpose of the notion of cross elasticity of demand discussed on pp. 99 ff, is to
measure the degree of competition offered to the monopolized product by any one particu-
lar product.
276 MARKET THEORY AND THE PRICE SYSTEM


revenue curve). For each average revenue curve the corresponding marginal
revenue curve has been drawn. In each diagram the line BE marks the
absolute upper limit to the volume of output of the product permitted in
each period by the available supply of the monopolized resource, no matter
how high the product price may be. This maximum output is, for each of
the diagrams, the quantity OB.


per
unit
MC




ß.C Ouon†i†y

Figure 12-3a

It is clear that in each of the cases shown, the monopolist-resource-
owner-producer will seek to produce that quantity at which marginal cost
of the other factors required for expanding output just balances the cor-
responding marginal revenue. This output decision on the part of the
resource-owner-producer is completely analogous to what we know to be
the optimum decision (mutatis mutandis) for an entrepreneur who is a
producer but not a resource owner. At any smaller output volume, it is
obvious, marginal revenue (derived from the use of the monopolized re-
source) is greater than marginal cost (of the other required factors). The
producer stands to gain, by a unit expansion of output, an addition to
revenue that is greater than the required addition to costs of production.
(No additional cost would be involved by the increased use of the monopo-
lized resource.) Thus, a smaller output volume would not exhaust all the
possibilities open to the monopolist-producer. On the other hand, a greater
volume of output (than that at which marginal revenue just balances the
marginal cost of expanding output) would also not be the best for the inter-
ests of the monopolist. At greater volumes of output, the marginal cost
curve is higher than the marginal revenue curve. A unit cutback in produc-
tion would save the monopolist, at the margin, an amount greater than the
MONOPOLY AND COMPETITION IN THE GENERAL MARKET 277


corresponding loss in revenue. The best output from the point of view of
the monopolist-producer is thus shown on each of the diagrams by the
distance OC (to be sold at the price DC), corresponding to the intersection
(at F) of the marginal revenue and marginal cost curves.
1. In Figure 12-3a this output happens to coincide exactly with the
maximum output (OB) that the monopolist is able to produce with his
limited stock of the monopolized resource. In this diagram the demand
situation, therefore, is such that it does not pay the monopolist-producer to
restrict his employment of the resource that he monopolizes. If he holds
any quantity of the resource "off the market" (that is, if he refrains from
using the whole supply in production), he will be sacrificing, on the units
of revenue not produced, a potential revenue that (even after it is reduced
by the corresponding saving in costs of production) is not offset by the
resulting increased revenue obtained on the units of product that are pro-
duced. In this case, demand is sufficiently strong and sufficiently elastic to
force the monopolist-producer to use his monopolized resource just as fully
as it would have been used in the absence of monopoly. The upper limit
to output set by the quantity available of the monopolized factor is fully
achieved despite the ability of the monopolist to restrict production.
If, with the same cost and demand structure of Figure 12-3a, the resource
(now monopolized) would have been available in a competitive market (in
the same aggregate quantity OB), there would have been essentially similar
market results in equilibrium. The full quantity of the (now monopolized)
resource would have been bought by entrepreneurs at a price, for the fixed
quantity of the resource required per unit of product, somewhat less than
FD. At this price for the resource, it would just have paid the entrepreneurs
to produce the units of product requiring the final units of the (now monop-
olized) resource. To produce a unit of product they would at this point
have been paying the sum FC for the other complementary factors of pro-
duction (as does now the monopolist-producer also), together with the sum
FD (or somewhat less) for the required additional quantity of the (now
monopolized) resource. The competitive market would have been in equi-
librium. It would just have paid the entrepreneurs to produce an aggre-
gate output of OB: the marginal cost of production (FC + FD) being exactly
covered by the marginal revenue (DC) (which is the price that consumers as
a whole are willing to pay for the supply OB, as seen from the demand
curve). Any smaller aggregate volume of output would have sold at a price
high enough to leave a profit. Competition would wipe out this profit
margin through output expansion up to OB.
With the resource monopolized, on the other hand, and with the monop-
olist-resource-owner himself the producer, the demand pattern in Figure
12-3a, brings the same results. The monopolist produces output OB, and
sells it at price DC per unit, paying the sum FC for the other factors re-
278 MARKET THEORY AND THE PRICE SYSTEM

quired for the marginal unit of output, with the difference being the net
proceeds that he receives (as resource owner) from the employment of the
marginal units of the monopolized resource.
2. In Figure 12-3b the cost curves, and also the limit-to-output line EB,
are all exactly similar to those in the previous diagram. The demand
situation, however, is different. In the present case the market demand
curve for the product (the monopolist-producer's average revenue line AR)


per
unit


AVC



`AR



C HB Quantity

Figure 12-3b

intersects the line denoting the marginal cost of the other factors to the left
of the line EB. This means that if the entire supply of the monopolized
resource were to be employed in production, the resulting output volume,
in contrast to the preceding case, would be so large that it could be sold
only at a price per unit insufficient to cover even the costs of the other
factors required (for the production of the last possible unit of output).
If there were no monopoly of the resource, it is clear that some quantity
would remain unused. Competition among sellers of the (now monop-
olized) resource would force down its price to zero,13 and entrepreneurs
would employ it only up to the point where the additional revenue gained
by employing the marginal unit is just greater than the additional costs in-
curred by the employment of the other factors of production complementary
to it. This would result in an aggregate output OH (assuming that the
13 Compare, on this point, the discussions on p. 131, ftnt. 15; p. 229, ftnt. 12; and
p. 268, ftnt. 4. An example of such a case is where a single producer has sole possession of a
piece of technological information that he is able to keep secret. Under competition
such information, vital though it might be to a certain branch of production, could
command no price. Knowledge of the technological secret could produce, with freely
available complementary resources, any desired quantity of product; the distance OB
would be infinitely great. Monopoly over the secret (conferred institutionally, for ex-
ample, by patent) would result in the consequences discussed in the text.
279
MONOPOLY AND COMPETITION IN THE GENERAL MARKET

costs for the monopolist are no different than they would be for a competi-
tive industry as a whole) and a competitive price GH.
In such a situation it is clearly in the interests of the monopolist-
resource-owner-producer to restrict the employment of the monopolized
resource so that the volume of output is cut to OC. For this output his
marginal revenue line intersects his marginal cost line at F, with the prod-
uct selling at a price CD per unit. The configuration of demand is such
that the interests of the monopolist-producer run counter to those of the
consumers generally. Although a sufficient further quantity of the monop-
olized resource is available to produce the additional quantity of product
CH, which consumers value more highly than the bundle of other com-
plementary factors required, the monopoly position of the resource owner-
producer leads him to withhold the required units of the monopolized
resource.

£¯
per
unit
¬MC

/
AVC
***`¯ ˜/¯"**^”*- i D



i< `^AR




. ¦
I 1

CB Quantity

Figure 12-3c

3. In Figure 12-3c we have still another possibility. Here again we
have the same cost curves and upper-output-limit line EB as before. The
market demand curve for the product intersects the line of marginal costs
of the other complementary factors to the right of the EB line (exactly as it
did in the case of Figure 12-3a). If the now monopolized resource would
not have been monopolized, it would have been fully employed and would
have brought a price in the market (again, exactly as in the case of Figure
12-3a). Competitive output would have been OB, selling at a competitive
price BG. However, in the present case (unlike the case of Figure 12-3a
but like the case of Figure 12-3b), it would be in the monopolist's interest
to restrict employment of the resource that he monopolizes, and conse-
quently, of course, also the volume of output, below the corresponding levels
in a competitive industry.
280 MARKET THEORY AND THE PRICE SYSTEM

This is so because at the "competitive" level of output OB, the marginal
revenue (associated with the monopolist's average revenue line) is less than
the marginal costs (incurred by the employment of the other resources
necessary for the production of the last unit of output). Thus, it would
pay the monopolist to restrict output to OC, corresponding to the point of
intersection of the marginal revenue and marginal cost lines.
The difference between Figures 12-3a and 12-3c thus depends on the
relation of marginal revenue to marginal cost, for a volume of output that
would exhaust the monopolized resource. If the marginal revenue is not
below the marginal cost (of the other required factors), the monopoly posi-
tion of the resource owner will be innocuous, with no divergency from the
price-output pattern that would prevail in a corresponding competitive in-
dustry. If marginal revenue falls short of marginal costs at this maximum
possible output volume, on the other hand, the monopolist's interest will
result in an output restricted below the potential competitive level, with
price correspondingly higher.
Figures 12-3a and 12-3c differ from Figure 12-3b in that in the latter
case the monopolized resource would be in a competitive world, a free good.
This was expressed in the diagram, we have seen, by the intersection of the
market demand curve and the line of marginal costs, to the left of the EB
line. In this case, as we have seen, it would always be in the interest of a
monopolist-owner of the resource to restrict its employment. Where the
demand for the product is sufficiently strong for the (now monopolized) re-
source not to be a free good (even in a competitive market), then, as we
have seen in Figure 12-3a and 12-3c, it may be in the interest of the monop-
olist-producer to restrict output below the level of a corresponding competi-
tive market. In such cases, with a given price the maximum possible output
can be sold at (the distance BG in Figures 12-3a and 12-3c), it would be the
elasticity of demand (at the relevant point G on the market-demand curve)
that will determine whether or not the monopolist-producer will attempt to
force up the price. As in Chapter 6 14, the marginal revenue corresponding
to any point on a demand curve (such as G) is given by the formula MR =
P ¯¯ Pl*> w n e r e P is t n e height of the point above the quantity axis, (such
+
as BG), and e is the elasticity of the demand curve at the point. Thus,
with a given distance BG for the average revenue obtainable by the sale of
output volume OB, the corresponding marginal revenue will depend purely
on the elasticity of demand (the required marginal revenue being less than
BG by the quantity ”BG/&). The more inelastic the demand curve is at
the point B (reflecting the weakness of the competition of other products),
the greater will be the value of ”BG/s, and, therefore, the lower will be
the relevant marginal revenue. For sufficiently low elasticity, marginal
14 See p. 98, ftnt. 7. (It will be recalled that for downward-sloping curves, the
elasticity is negative.)
MONOPOLY AND COMPETITION IN THE GENERAL MARKET 281


revenue will fall short of the relevant marginal costs, and, as we have seen,
make it in the monopolist's interest to exploit his monopoly position through
output restriction.15

THE CONSEQUENCES OF MONOPOLY OUTPUT RESTRICTION
If conditions are favorable, we have seen, it may be possible for a
market participant, who is the sole owner of a particular resource, to monop-
olize the output of a particular product and bring about a price-output pat-
tern for the product different from what would prevail in a competitive
situation. In the absence of the particular required constellation of de-
mand and costs, we have seen, the mere fact that the sole control over an
essential ingredient in a product gives a particular producer the monopoly
of the product's output will not lead to any deviation from what would
prevail in the absence of monopoly. The phenomena prevailing in a gen-
eral market, therefore, where a host of products are produced by the coopera-
tion of a host of different productive factors will not necessarily be distorted
merely because of monopoly control over some of the resources, even if this
results in monopoly control over the output of particular products.
Where conditions do favor monopolistic output restriction, the conse-
quences are not difficult to understand. The monopolized resource is
employed, and the product produced, in smaller volume than under compe-
tition. Complementary factors of production that, in the absence of monop-
oly, would have been employed in the monopolized industries will seek
employment elsewhere. In these other industries their productivity will
be lower, and consequently the price that these complementary factors will
bring will be correspondingly lower. On the other hand, the output vol-
umes of other products will be increased somewhat due to the transfer of
these other productive factors. The owner of the monopolized resource,
even after market forces have eliminated all entrepreneurial profits, will
still finish with a more desirable income than he would have been able to
secure without exploiting his monopoly power. The owners of the other
factors will be somewhat worse off, both as a result of the possibly lower
prices they may be receiving for their resources, and as a result of the shift
of production from the more desirable (monopolized) product to other,
somewhat less urgently desired products. These consequences will be
affected by the revisions in consumer income allocations induced by these
income and price changes, and also by the consequent ripples of change
affecting the organization of production.

is A monopolist, like any producer, may select one price-output decision as the best
that he can achieve with a given plant, but may select quite a different plan when he is
free to construct an entirely new plant. In the long run a monopolist's cost curves are
(like those of all producers) different from those relevant to short-run decisions.
282 MARKET THEORY AND THE PRICE SYSTEM


The greater the number of resources that are monopolized by the same
single resource owner, the more powerfully he will be able to distort market
activity. Monopoly over many resources, making possible monopoly in
the production of many products, will mean correspondingly weaker compe-
tition from non-monopolized products. This will provide the monopolist-
producer with exceptionally attractive opportunities to gain by raising the
prices of his products.

THE MONOPOLIST-PRODUCER AS A RESOURCE BUYER
We have already seen that where a particular entrepreneur or group of
entrepreneurs is the only buyer of a particular resource, he or the group may
be able to obtain a short-run advantage over competitors (who only use other
resources) by forcing down the price through restricting their purchases of
the resource.16 We saw that this possibility is by no means completely
analogous, however, to the case where a monopolist-owner of a resource is
able to force up its price by holding some of it off the market. The analysis,
in the preceding sections, of the effects on the market of monopoly in the
production of a particular product (arising from a monopolized resource)
makes possible the exploration of a further case involving monopoly on the
part of a resource buyer.
Suppose that a producer monopolizes the production of a particular
product by virtue of his sole ownership (in his capacity of resource owner) of
a resource (say, resource A) essential to its production. Suppose further
that the production of the monopolized product calls for the employment
of (among other productive factors) a resource (say, resource B) specific to
the production of this product. Then it is clear that the monopolist-pro-
ducer can enjoy complete freedom from competition in buying this specific
resource B. No other producer will ever desire to buy this resource, so
long as the production of the only product it can be used for is monopolized
by the monopolist-owner of resource A. The monopolist-producer will
adjust his purchases of the specific resource B, as we have seen in a previous
section, so that the marginal revenue that he can derive from the last unit
purchased of it is just higher than the increase in costs necessitated by its
purchase. In the present case the producer will be able to rely on the low
price that he thus secures, not only for the short run, but also for the long
run. So long as he monopolizes production, he will be the only buyer of
resource B who purchases it at a lower price (but for this reason being able
to buy only a smaller quantity of the resource) than would prevail in a
competitive market.
Under certain conditions the position of the monopolist-producer as

16 See pp. 272-274.
283
MONOPOLY AND COMPETITION IN THE GENERAL MARKET

sole buyer of the specific resource B may bring about results that seem
analogous to what the monopolist-seller of a resource is able to do. In the
diagram, OBA represents the upper limit to the volume of output obtainable
from the supply of the monopolized resource A (obtainable; that is, if all
other inputs, including the specific resource B} were plentiful). On the
other hand, OBB represents the limit to volume of output obtainable with

*
per
SMC
unit




Quantity
B
BBA

Figure 12-4

the actual supply of the specific resource J3. The market demand curve
for the product (the monopolist-producer's average revenue curve) and the
corresponding marginal revenue line are also shown on the diagram. The
cost line shows, for each successive unit of output, the increment in costs
of production attributable to all the quantities of resources required for
its production except resource A and resource B.
If the resource A were not monopolized, the situation would then be
as follows (assuming other things to be unchanged). Output would be
produced by competing entrepreneurs in the aggregate volume OBB> this
quantity being sold at the price BBD. Since this aggregate output requires
all the available supply of resource B, but not all the available supply of
resource A, the latter resource (if specific to the production of this product)
would be a free good. Competition between sellers of resource A would
force down the price to zero. Resource B would command the price DH
in the resource market. Since, however, resource A is monopolized by the
producer, it can be in his interest to restrict output to the quantity OC
(corresponding to the intersection at F of the marginal cost line and the
marginal revenue lines).

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